A rules-based system may have increased the volume of trade, but not everyone has.
The growing and diverse trade that has taken place across borders under the aegis of the World Trade Organization (WTO) since its inception in 1995 has been widely seen as desirable. Strict adherence to its fundamental principle of promoting free trade by lowering tariffs and removing barriers is cited, almost as a panacea, for achieving fairness and universality in international trade. It is believed that such commercial activities are in the interest of both exporting and importing countries. Since the acceptance of this rules-based system, the fact that world trade has grown, both in volume and in value, exceeding the secular growth rate of world GDP, has been hailed as a mark of the success of the WTO in the administration and enforcement of elaborate regulations.
With 25 years of records on the workings of the WTO now available, there is plenty of data to make an objective assessment of its record, including to dig deeper into some of the muted comments made about its shortcomings. The latter includes claims that it has benefited developed countries which generally have better bargaining power and are usually the producers of most goods and raw materials for industries to the detriment of poorer countries. In addition, it is worth delving into whether the new rules-based trading system has been meaningfully scrutinized from the perspective of environmental sustainability, public health freedom and consumer safety. workers and workers’ interests, including broader human rights.
Adopted in 2001, the WTO’s Doha Development Agenda placed development concerns at the heart of the work of the organization. However, reaching them remains a challenge. There is an almost impassable gulf in the interpretation of what constitutes “free and fair” trade between the rich and powerful nations of the OECD and the lot of more numerous, densely populated and often powerless developing countries. A lingering problem that also remains is that despite the WTO’s elaborate set of rules in place, a plethora of bilateral and regional trade pacts continue to be negotiated and agreed upon year after year.
Another grumbling concerns the inability of the WTO to regulate the vast global trade in raw materials, particularly hydrocarbon-based fuels. Instead, the mighty Organization of the Petroleum Producing and Exporting Countries (OPEC) decides quantities and all other major terms of trade for crude oil and natural gas. No attempt was ever made by the WTO or previous trade mechanisms to subject it to their regime. In fact, it seems to have encouraged the emergence of similar cartels in the trade of other commodities as well.
It is also worth noting the slowness of the decision-making process of the WTO, which is based on the search for a consensus between all the participants of all the United Nations institutions. This path necessarily requires the painful construction of a total agreement between all its member countries, that is to say a hundred percent unanimity among its 157 member countries on questions, large or small. If in some matters, this can be a useful practice to adopt, in particular to ensure the sustainability of the agreements concluded, the disproportionate delays caused in commercial matters frequently undermine their effectiveness. Perhaps, an equally pertinent question to consider is why there is no mechanism available to the WTO to enforce its own arbitral decisions in the many trade-related disputes between members. This also applies to the trade policy reviews of countries which it carries out regularly in accordance with its Charter.
CONTEXT OF TRADE RULES DEVELOPMENT
To enable an objective assessment, it might be useful to briefly recall the context of the evolution of its framework for action at the WTO. Shortly after the Great Depression of 1929, it was President Franklin Roosevelt (FDR) who piloted the Reciprocal Trade Agreement Act, 1934 to the United States Congress. Perhaps for the first time in history, this pioneering legislation sought to prescribe a set of rules for international trade. It stipulated for the executive wing that henceforth all tariffs had to be negotiated with foreign governments and explicit trade agreements made with trading partners to reflect the arrangements. However, overall tariffs generally remained high because they were largely determined by bargaining among the vested interests involved. Nor did the exercise necessarily lead to an increase in trading volumes or lead to a significant move towards free trade.
For real, this only began to happen after the end of the Second World War, when a serious effort was made to seek ways and means to avoid bloody and protracted conflicts such as those which the world had to cross twice in the previous three decades. . Economic cooperation and integration among nations have rightly been seen as a way to achieve much-needed world peace. In fact, a precursor to this was the 1941 Atlantic Charter negotiated at the height of the war by FDR and Winston Churchill, then British Prime Minister. Both leaders showed exceptional foresight and serenity in proposing a world trading order that would treat all nations fairly, whether they belonged to the winning or losing side in the current world war. For them, such an approach would be a significant measure to ensure that countries do not go to war again.
Although the 1934 U.S. legislation was based on simple mercantilist principles that exports are good and imports are bad, it laid the groundwork for building a structure based on the belief that all international trade should be rules-based. . Toward this end, the first major step was taken in 1947 when a General Agreement on Tariffs and Trade (GATT) was signed between the United States and its trading partners. It was a multilateral version of the previous disparate bilateral trade agreements he had concluded. This provided for the establishment of mechanisms for the gradual reduction of tariffs to make trade freer. It has also put in place provisions to prevent backsliding on commitments made, except in defined exceptional circumstances.
Broadly, these uncertain events could fall into four categories: unfair trade practices such as the imposition of tariffs to counter subsidized exports; national security considerations to ensure there was no dependence on an enemy nation for essential goods; the disruption of the market caused by excessive and sudden import surges which gave domestic producers too little time to adjust and, fourthly, the dumping of goods by exporters below their cost of production onto importing countries .
Over the next 45 years, a host of trade-related rules and procedures evolved under the aegis of the GATT, helping to increase trade across national borders. This growth extended to both developed and developing countries, and there was a noticeable diversification of the products traded. Intra-country trade within the emerging world has also become large and significant. Several new nations joined the GATT, which promised to provide protection from changing trade rules. War-affected countries, as well as newly independent countries in Asia and Africa, looked to them to improve the lot of their citizens and put their economies on the path to development and poverty alleviation. The prosperity of Asian tigers viz. Japan, South Korea, Hong Kong and Taiwan were born from the entry into force of such regulations.
EVOLUTION OF THE WTO
With some degree of robustness in cross-border trade and fewer restrictions on international capital flows, many countries could increase their GDP and make progress in reducing widespread and palpable deprivation. Making trade a lasting pillar was the goal of the next effort that began in the mid-1980s. Countless rounds of deliberation, spanning a decade, culminated in the creation of the WTO. With the exception of countries that did not believe in free markets or open trade, the clear goal was to make all nations of the world members of the new body. Few countries failing this main qualifying criterion, almost all nations – large and small, old and new – have joined the WTO. Among the main exclusions were China and Russia. It was a few years later, in 2001, that China was admitted, but only after making firm commitments to fair trade and providing a roadmap for full openness.
Broader membership now necessarily meant dealing with a wide diversity of countries at different stages of economic and social development. Naturally, each had a different concern and priority. The role of developed countries, while remaining intact in promoting free trade, came to be circumscribed by these new considerations. These considerations included food security, job creation, reducing growing disparities in income and wealth, and protecting specific groups and regions. Investment flows from developed countries to the Third World, as well as intellectual property concerns, also had to be taken into account. These concerns were significantly and inextricably linked to trade.
Almost invariably, these considerations have allowed occasional protectionism through the imposition of tariffs and other barriers in prescribed circumstances. Such measures, combined with the unprecedented “development” issues currently on the table and the divergent interests of member countries, have affected the evolution of free trade. As might be expected since the majority of WTO members belong to the developing country category, most deliberations focus on development issues rather than purely trade promotion. Along with this, there remains the problem that in the absence of a mechanism to enforce final verdicts in member disputes, offending nations are often tempted to be oblivious and continue to adopt positions that harm the interests others, especially the poorest nations.
Dr. Ajay Dua, a progressive economist, is a former secretary of the Union Ministry of Commerce and Industry.
Part 2 of this article dealing with overcoming perceived deficiencies in the functioning of the WTO will appear next week.